In an interesting twist, new home sales jumped unexpectedly in July, while existing home sales dropped unexpectedly during the same period, according new data released this week. So what gives? And is this good, bad, or neutral news for the real estate industry? Let’s explore.
This week, the U.S. Commerce Department reported new home sales surging 12.4 percent, hitting their highest level since October 2007, a year before the housing crash when new home construction was firing on all cylinders. Sales are up 31.3 percent from last year, but the pace of housing starts isn’t increasing as dramatically as sales, indicating that the sector hardest hit by the crash is recovering, but not necessarily enough to impact affordability levels or attract first time buyers (which remain below “healthy” levels).
There’s an inventory correction slowly under way fueling the new home sector, which is gaining momentum (helped in part by mortgage interest rates remaining historically low).
How new and existing sales compliment each other
The truth is that these new home sales are likely helped by tight inventory levels of existing homes for sale. In another twist, the median price for a new home actually slipped 0.5 percent from a year ago to $294,600 while existing home prices continue to rise. Uh oh, you’re thinking. Fret not, that’s good news – for markets to be healthy, they need more first time buyers, so this puts a segment of the market within their reach. That’s good news.
On the flip side, existing home sales actually fell in July by 3.2 percent, dipping for the first time year-over-year since last November, according to the National Association of Realtors (NAR).
Lawrence Yun, NAR chief economist, says existing sales fell off track in July after steadily climbing the last four months. “Severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month,” he said.
“Realtors® are reporting diminished buyer traffic because of the scarce number of affordable homes on the market, and the lack of supply is stifling the efforts of many prospective buyers attempting to purchase while mortgage rates hover at historical lows,” Dr. Yun added.
Market is “undershooting its full potential”
The median existing home price rose 5.3 percent in the last year to $244,100 (marking the 53rd consecutive month of annual gains). Inventory rose 0.9 percent in July, marking 14 consecutive months of year-over-year declines.
“Although home sales are still expected to finish the year at their strongest pace since the downturn, thanks to a very strong spring, the housing market is undershooting its full potential because of inadequate existing inventory combined with new home construction failing to catch up with underlying demand,” adds Yun. “As a result, sales in all regions are now flat or below a year ago and price growth isn’t slowing to a healthier and sustainable pace.”
The share of first-time buyers was 32 percent in July, which is below last month (33 percent) but up from 28 percent a year ago. This again marks the importance of the intersection between new construction and existing sales.